OK, listen. I know that politics by itself is a nasty topic right now. And nevermind that I’m about to propose an opposing opinion to the National Association of Realtors. But, as a real estate professional and an economist, and always a student of causality, I want to weigh in on this.

Any article or media post that you are reading, with homeowners saying “In the first 24 hours Trump was in office, he already cost me $400 this year,” is just a false statement. And I get SO ANGRY when people, namely the mainstream media, put out sound bites or opinions and call it news. So, here’s what ACTUALLY happened, folks.

First of all, let’s review what an FHA mortgage is — FHA is the Federal Housing Administration, which was created to insure mortgages and collect fees from borrowers to reimburse lenders in case of a default. They are attractive to borrowers, particularly from a credit-worthiness standpoint, because they are easier to qualify for and require a down payment as little as 3.5% of the purchase price, plus closing costs and a monthly MIP (mortgage insurance premium).

From 2006 to 2009, there was not enough in the FHA reserve to bail out all the banks staggering under defaulted loans. In response to that, the US Treasury just printed money like there was no tomorrow ($1.7 BILLION, to be exact) to keep the FHA funded, and therefore the banks didn’t learn their lesson — see my previous write-up on The Big Short. After this debacle, FHA premiums rose significantly — in 2013, FHA borrowers paid 1.75% as an up-front fee at closing, and an additional 1.30-1.35% of their total purchase price over 12 months as mortgage insurance premium (MIP) in addition to their monthly mortgage payment. The purpose of these payments is for the FHA to replenish it’s cash reserves since the crash completely wiped it out — just to keep the banks with terrible underwriting guidelines and more concern for profit than potential risk afloat, which in the end, wasn’t at risk at ALL (again, see my Big Short article!), but I digress.

So. On Jan 10 — just ten days before leaving office, the Obama administration, in what some have called a political move to boost public opinion and ratings on the way out — made an announcement that effective Jan 27, they would maintain the 1.75% premium cost at closing, but would cut the MIP, currently at 0.85% of the purchase price, down to 0.60%, saving NEW homeowners closing after Jan 27 an average of $400 a year. It does NOT “cost” current homeowners/borrowers anything, since nothing changed for them after Trump halted the lowering of this premium — perhaps a lost DISCOUNT, but no added costs for borrowers.

So why did the Trump administration suspend this discount to new borrowers? As I drafted this article, the only official statement is: “FHA is committed to ensuring its mortgage insurance programs remain viable and effective in the long term for all parties involved, especially our taxpayers,” and the new HUD Secretary, Ben Carson, added he would “work with the FHA administrator and other financial experts to really examine that policy.”

I think putting more thought behind this, instead of just enacting more “feel good legislation,” is prudent, especially where — and this is my “well informed” opinion for sure — all signs are pointing to a correction in the marketplace, yet again. We’re seeing it here in the tremendous uptick in our short sale firm, where we are now getting 4-5 new incoming cases a week, an uptick from our usual pace of 1-3 new cases per week, mostly due to job loss or reduction in income. Income and employment have not seen increases in line with the increases in the price of housing, which is a primary indicator for when we’re due for a correction.

THAT said, if we are in for another correction, banks will be looking to the FHA for bail-outs when defaulting mortgages increase as people can no longer pay their high mortgage payments (if they were even credit-worthy to begin with), and the FHA relies primarily upon the fees it collects from borrowers to bail them out. If there’s no money left, well then, one could assume another total obliteration of banking as we know it. But since no one learns from history, if the FHA runs out of money the most likely scenario is that we, the taxpayers, will bail out the big banks, literally giving them ZERO risk in making these bad loans. Hell, they should just start issuing sub-prime loans again, since none of this does anything for accountability anyway! In that case, since the facts and economic indicators apparently don’t matter, they should just go ahead and decrease the MIP and save everyone $400 a year.

All sarcasm aside, I have to say it’s an encouraging sign for the FHA to keep the rates stable until they complete an economic analysis (like any insurance company or prudent financial firm would) as to how much risk they’d be exposed to in the event of a mortgage collapse, make sure they have sufficient reserves, and THEN make the adjustment.

Or they could just get rid of it altogether, since it won’t matter and the US Treasury will just print more money and bail out the banks anyway!
: – P

End of rant, and thanks for reading. And remember, confirm the accuracy of where you’re getting your “facts.” Note: if it’s the media or a National Association, or anything else poised to make a profit from swaying opinion one way or another, better check multiple sources!

I’m super pumped about this announcement — in fact, I’m so excited, that after sharing this news far and wide via email and social media, I forgot to post it here! So please join me in extending a warm (though belated) AARE welcome to Attorney Robbie Reutzel — our new Director of Acquisitions and Liquidations for the AA Real Estate Group!

As I’ve gained experience in the real estate world and my business has grown, I have expanded my focus to include as many steps in the real estate process as possible — acquiring distressed properties, expediting short sales, rehabbing and selling properties, and I also include rentals and property management as part of my business model. Some call this ADD. I call it smart growth! And since people have asked me recently why we’re putting such a focus on rentals, I figured an article was due!

So, why include rentals?

Once purchased and renovated, rentals provide stability and cash flow to ALL lines of business, smoothing the months between the sale of our rehabbed properties. Rental properties as we acquire them are intended to be held long-term and provide a “passive” (though anyone who believes rentals are completely passive, has never actually held any!) system of generating cash flow for the long-term operations.

I’ve always recognized that rehabbing was just one facet of the business and that if the market changes, deal flow dries up, or a loss is sustained on a rehab deal, without a foundation of rental properties, there would be nothing left. So my goal was to include rentals as one piece of the pyramid to sustain longer term operations. They also provide some peace of mind and a break from managing the time-consuming contractor/ management roles and day-to-day tasks of rehab projects. I firmly believe that if you do rentals right and set up your processes from the beginning, they’re less time intensive or stressful as some rehabs and development projects turn out to be.

I’ve always believed in the concept of turning “quick cash” into “long-term wealth building,” but I had to accomplish this slowly and in different ways than many other investors have done. My strategy was to pick up one rental building for every 4 rehabs, which sounds easy enough, but it was very rarely simple. Because of my rough start in the beginning, I was out of the credit game for a long time and had to find other avenues for generating rental income.

So, working with private money and cash generated from my wholesale and rehab deals, I began buying single family homes in markets outside MA. And let me stop here for a minute to give some street cred to local power couple Linda and Nyrik Huuskonnen, who introduced me to my first “out-of-state” experience beyond MA and NH — welcome to the Pittsburgh market! It was here that I could invest some cash from my rehabs without having to chase down bank financing, and began purchasing single family homes for between $5-15K, investing an additional $20-30K per unit, and then renting them out for $500/month. Pretty good deal, right? There’s a separate story on the challenges of running an out-of-state investment company (Coming soon!), but it certainly beat paying $300K in Mass to only make $3000/month in gross income.

Now that I have re-established my credit and my business is financeable, AARE Group is acquiring both local and out-of-state rental units at a more aggressive pace, making sure that we set aside the cash to cover down payments. Our typical rental lending relationship will fund 75% of the acquisition price as an investment.

Another key to the success of this process is property management, which we have folded into the AARE Group as well (while not publicly marketed as of yet). As with everything that we do, I find a solid system makes all the difference. Key points we exercise here are all about tenant screening and pulling from a greater tenant base to ensure we get the best of the best. Our goal is to attract better tenants with better properties. This, along with treating everyone as customers instead of just “tenants,” are a couple of the ways we are able to retain our good customers and, when we have a turnover, we use it as an opportunity to refresh the unit and bring it one step closer to “flip quality.”

I’ll wrap up with an analogy. In our office, we talk about the difference between firing cannons and pistols. A rehab is like shooting a cannon ball’s worth of cash at a project, expecting a return of 1 1/2 cannon balls, roughly 12 – 20% ROI, or 25 – 50% Cash on Cash ROI (depending on location, and market conditions).

A rental is like firing a small bullet of cash at a project to create a net cash flow of $150-300/month per unit (after expenses, repairs, mortgage, taxes). THEN, we work to make money on the cash flow, as well as getting a slight benefit from the depreciation we claim through the investment and principal paydown, and over time, the asset increases in value (although we NEVER count on this happening) — a win – win – win – win!

If you have the resources and are willing to set up a system to maintain your properties, rentals will serve your real estate investment business well.

I find people getting started in real estate investing are often so focused on the details and fine points of real estate and hunting for their first deal that they skip right over the steps necessary to create a firm foundation for their business. I know these steps can seem tedious, especially if you’re raring to get out and start breaking into meth labs, but trust me — they will pay dividends for years to come and you’ll thank me later.

In fact, Chapter 2 of The Complete Dealflow System is entitled “Business Set-up & Preparation” and walks through the five steps I recommend to establish your business and systems and procedures that will provide you with the best start possible. Here’s an excerpt to get you started:

Step 1: Set up a Contact Database & Create Categories

If your network is your vital component, your contact database is how you maintain, organize, and grow your relationships.

You need a place to organize your contacts and business cards in a way that is very organized and easy to access. I cringe when I see a binder of cards tucked away in sleeves a person bought at Staples. If that is your system, please get rid of it. It will completely hinder the way you do business.

The transparent sleeves business card page, and the three-ring binder are the low-tech solution for what to do with all those business cards. This is a start if you only have a handful of cards to sift through — at least you have them all in one location. Once you start networking heavily, this system becomes ineffective. The biggest problem is that they are usually “organized” only by the chronological order in which you receive them, making retrieval difficult.

Qualities of a Good Contact Database

A system organizes the connections you make through networking, and as you pick up contacts along the way. This is also called your Sphere of Influence, or “SOI.”

A good Contact Database allows you to:

Quickly retrieve a person’s information

Target certain types of buyers based on their criteria

Begin a Private Lender Database to help you raise money down the road (if you are going this route)

Quickly reach out to birddogs. Birddogs are anyone you recruited to help you find deals, motivated sellers, and distressed properties. (More on recruiting birddogs in Chapter 4)

Quickly reach out to other deal sources, where you can bring in more leads for your follow up & analysis.

Most importantly, a good contact database is intuitive to how you work and think. A program that is user-friendly for one person might be confusing or annoying for you to use.

List of Contact Management Databases:

Outlook

Google Contacts/ Gmail

MyMailList Deluxe

Realflow

The 360 Investor

iContact

Cardscan (automatically syncs to Outlook)

Open Road (need to pay)

Microsoft Excel / Spreadsheet Program

DECIDE, COMMIT and PURCHASE an appropriate Contact Database that can fit your needs.

TIP: Do NOT GET discouraged if you’re not a techie – the directions that come with these things now are so simple, even I can understand them. Take some time (but no more than 1 hour) learning how to use your new software, as this is a KEY to building your business.

Buyer Criteria – Segment Your List

After your business set up, building your buyers list – and then QUALIFYING them — is your next step. Your new contact management system is a great way to organize those leads, and any leads you bring in or make through your network. When you do have a deal, all it takes is selecting the right category to blast it out to people looking for, say, a single family rehab, north of Boston.

CREATE CATEGORIES in your Contact Database: To assist you in organizing everything, here are some examples of how to categorize your contact database:

Buyer – Investor Prospect

Buyer – SFH — Northern MA *

Buyer – Multi — 1 to 4

Buyer — Multi – 5 +

Lender – Private & Hard Money

Lender — Private Prospect

Lender – Conventional

Buyer — L / O **

Buyer – Retail Prospect

Buyer – Retail

Attorney

Contractor

Agent – REO & Distressed

Agent

Lender –Mortgage

CPA / Accountant

*SFH: Single Family Home

**L/O: Lease Option

Q: Why distinguish between 1-4 Unit Multis, and 5-unit + Multis?

A: There are different types of financing for 1 to 4 units versus buildings with 5 units and up. Some of your buyers (be they retail or investor-buyers) may use conventional financing, and anything over 4 units is considered a commercial loan. Check with your local mortgage broker for the accurate classification… and make a connection for your power team while you’re at it!

Looking Ahead

While you are looking for the best Contact Database to fit your needs, working habits, and personality, find one that is compatible with a reminder calendar. The best is if you can find one that is able to “time activate” your tasks and other reminders, even your marketing calendar & follow-up schedule if you think you can put it all in one place.

Time activation:

Find one that literally pops up reminders for tasks (Google/Outlook)

Even better if you can sync it with your phone!

We’ll talk more about calendars that time active your tasks in Chapter 4. For now, keep in mind when you are considering programs.

For my recommendations and further details on steps 2 – 5, you’ll have to just buy the system! Just kidding! Although it’s not a bad idea… especially since I built it to pay you up to TEN TIMES the purchase price when you sell me your first wholesale deal, if you’re based in MA & NH!

; – )

What have you found to manage your contacts? What do you like or not like about it? I’m always looking for the latest tech solution!

I am happy to report this project went smoothly and was completed (mostly) on time. Sorry — boring post. Nothing to see here. I know you all like it more when I lose my shirt and have LOTS of issues and drama, but SOMETIMES, deals work the way they’re supposed to! Mostly. A huge thanks to Victor and our new new crew we’ve had working on this project — we may have finally found our A Team!

This was a complete gut job. What was once a dreary property with small, cut-up rooms, is now a cute little center entrance cape with an open floor plan and tons and tons of cabinet space in this huge kitchen.

Issues we addressed:

1. The back entrance to the house was pulling away from the main part of the structure, so we tore the whole thing down and walled off the door which contributed to creating the new open floor plan.

2. The staircases in the house were very narrow and located in awkward places. After we considered all the options, we chose to rip everything out, get an architect and do a whole new floor plan. Since we saved the money we would have spent trying to re-work the existing conditions, the entire new floor plan only cost an additional $1,500 after we had it all worked out. A huge shout out to our ace architect Joanna Reck on helping out with this one!

Part of our plan to open up the home and improve the flow was to move the entrance from the driveway or right side of the house to the center and we added a paver walkway. This helped us open the kitchen dramatically.

3. Other improvements: We moved the washer/dryer from the basement to the 1st floor, put in a nice patio on the far side of the house with a view of the neighborhood, added all new systems (high efficiency HVAC units, plumbing, and electrical), all new floors, windows, roof, and hardwood floors throughout. And of course, we created a sexy new master bath on the 2nd floor!

4. The final item to be completed was the rock wall of dread. After initially being “asked” by the building department to address it, we got our engineer involved who drew up proposed plans, and also pointed out that this may NOT even be on our lot — but realizing we’d make more friends by fixing it then passing the buck, we then hired a mason to re-do the wall as per the plans. The problem: once he got started, he finished way too quickly (Can you believe it??). He didn’t understand we needed to have the engineer involved for inspections and sign off at certain points in the process, and we were to turn these stamped plans into the town’s engineer. We are having him undo and redo most of the work, so we can get our final “thumbs up” from the town and finish this job up.

And with an UPDATE: We had our open house over the weekend, with over 40 parties viewing the property, and already have multiple offers!! Hopefully we’ll have a good ending to this love fest with Woburn and we hope our new buyers appreciate our hard work and create a happy home here.
Onto the inspection — cause you know, you can’t count your chickens until the deed is recorded!

About AARE Group

We are a real estate acquisition, sales and management company dedicated to helping homeowners solve problems and seeing hidden value while serving investors and leaving neighborhoods better than we found them, since 2005. We do this by buying, selling, and managing single-family and multi-family homes — 150 redevelopment deals and over 50 rental units in New England, Pennsylvania and Florida.